Filing for Determination on a DB plan

[Lori H]

I know the IRS is looking at more DB plans that choose NOT to file for determination upon termination. Does anyone have a link that gives reasons why it is a good idea for a sponsor to file for determination?

Thanks

[John Feldt ERPA CPC QPA]

http://benefitslink.com/boards/index.php?s...st&p=157856

Some excerpts, with revisions and to make it relevant for DB:

During the life of a qualified plan, the plan has enjoyed the benefits of tax-free earnings and tax-deductible contributions. These have been allowed by complying with the qualification requirements imposed by the Internal Revenue Code, the treasury regulations, and other guidance. Thus, in order to keep the IRS happy, the plan has been required to maintain compliance both in operation and in form. That means two things:

1. The plan must operate in accordance with the terms of its written plan document and under any requirements under the law and guidance, and
   
2. The plan must have a written document which is qualified (meaning its language meets IRS approval).
   

Of course, the above two items are only at risk if the plan is examined by the IRS. Item number 2 can have its risk eliminated by having the IRS approve the plan’s language. If the plan gets such approval and has also operated by that plan language, then the whole plan’s risk is virtually eliminated. That approval would be in the form of a favorable IRS Determination letter.

So, how do plan documents get that favorable letter? Under a prototype, the IRS provides an opinion letter (or an advisory letter for a volume submitter) which approves the document's basic language. This is not exactly the same as a Determination Letter (even though the IRS sometimes says it is), but it provides assurance to the Employer that the basic portion of the document has IRS approval. If the DB plan has not been restated yet for EGTRRA, then the last time the IRS provided prototype document approval was generally in 2002 for the GUST prototype documents. Plan language changes have been required by law since that time, such as amendments for:

• EGTRRA (generaly due in 2002)
  
• Minimum Distributions (generally due when the plan terminates or is restated for EGTRRA)
  
• Mandatory Distributions (generally due with the company 2005 tax return deadline)
  
• Final 415 Regulations (generally due in 2007 / 2008)
  
• PPA of 2006 (generally due in 2009)
  
• Final 436 Regulations (generally due in 2009 / 2010)
  
• Pension Funding Equity Act
  
• Final Normal Retirement Age Regulations (generally due in 2009 / 2010)
  
• HEART Act (generally due in 2010)
  
• WRERA (generally due in 2011)
  
• And so on…
  

Most of the above amendments are not IRS-approved model amendments (meaning the IRS did not issue model language). Therefore, the only sure method to guarantee that it meets the IRS's qualification requirements upon plan termination is to submit a favorable determination letter request using IRS Form 5310. If you elect not to request an IRS review of the plan’s language, you may need to agree to hold your document provider harmless from any errors or deficiencies that could have been corrected if the plan were to request and obtain a determination letter when the plan terminated.

If the plan has been restated for EGTRRA, only a small portion of the language for the above amendments are included in the IRS-reviewed EGTRRA document - yes, the EGTRRA DB prototype documents already have a few tack-on interim amendments added.

When the IRS reviews the Form 5310, the normal result is a favorable determination letter (an IRS stamp of approval for the plan’s language). Usually during the review they indicate where language changes are necessary, and this can vary by plan type and by IRS region. These required changes are allowed after the plan termination date only because the plan submitted under Form 5310.

Plans terminating right now should have already have done the amendments for all of the amendments listed above. The language for a portion of this list is not in the EGTRRA restated document and is only under good faith compliance. That language will all be wrapped into the next prototype (or volume submitter) plan document (the PPA restatement?), thereby giving full approval by the IRS at that time. However, if the plan terminates now, before adopting a PPA restated document in 2016, then that language has no IRS approval. The only way to get approval is to file a Form 5310.

It’s important to understand also that a lot of the guidance for the recent laws, including portions of PPA of 2006, have not been issued, so writing perfectly compliant amendments now may not be possible. But a plan that terminates now MUST be amended to add the required language for these laws - depending on the plan year and the actual plan termination date. Again, the only way to get an approval stamp on any of that language is to file a Form 5310.

Any plan that terminates without filing a Form 5310 will be considered open game if they get audited. When the guidance is issued for each new law, will the IRS auditors look for language that complied with that guidance? If the plan obtained a favorable determination letter via form 5310, then the IRS cannot audit such language.

So, a client that does not submit a form 5310 to the IRS upon termination risks having to negotiate a sanction with the IRS upon audit. That sanction will not be less than any fee the plan could have otherwise paid by submitting Form 5310 for ask for a Determination Letter or any fee that would have applied by submitting under EPCRS. Perhaps a terminating plan that does not file for a Determination letter is seen as potential revenue for the IRS (we hope that's not how they view these things).

With the knowledge from the above explanation, why would a terminating plan not submit a Form 5310?

1. Okay, suppose the client refuses to sign amendments timely and will not submit under EPCRS or they have some other clear violations that they refuse to fix. These things would stick out like red flags in the Form 5310 application. If that is the case, then it’s advisable to have them fix these things, but if they will not, then have them steer clear of the Form 5310 filing, assuming they have first been advised of the risk they are taking by not fixing their plan problems and the risk they are taking by not filing a Form 5310.
   
2. Another reason may be cost, but really, that cost is a small price to pay for protection against the IRS.
   

I hope you find this helpful. If you read the whole thing, my apologies for the length!